Activist investing with Eric Schleien
Today I had the pleasure of interviewing Eric Schleien. Over the past decade, Eric has trained thousands of individuals including board members of public companies as well as several Fortune 500 CEOs. Eric specializes in organizational culture and has become a leading authority on organizational culture in the investment industry
Eric has been investing for 15 years and has been using breakthrough coaching methodologies for over a decade. Eric had the insight to combine proven coaching methodologies with shareholder activism techniques to create an entirely new model for shareholder activism that was more reliable and created greater sustainable results in a rapid period of time. On average, Tribal Leadership produces a 3-5x increase in profits of culturally troubled companies within an average of 24 months or less
Eric currently resides in Philadelphia.
Ney Torres: [27:04]
Yeah. Interesting. So, how did you decide to go into activism? Please can you
explain to me how hard is it to actually be an activist because I see it two
ways. If you go into a company and has a nice management, whatever they lead
you in which I really doubt, that everything's okay. But if you have to serve a
proxy fight because they don't want to lose control, that can be a lot of money
for lawyers.
Eric Schleien: [27:34]
Yes. So, you know, luckily, the person who I'm working with who I have not said
their name, he is putting up all the money for any kind of the proxy fights
that we do. And that's his game, and that's what he's experienced with. The
process is going to look like this. And just to give you a sense of how hard this
is, we've been working on this now intentionally for about a year. And so far,
we've looked at a bunch of companies, and there's only one so far that may work
out and that election is still, I think, like 11 months away. It's all it's
almost a year away, that board election. There was another board election.
There were two other board elections that we thought we would have won. One of
them didn't work out. There were some reasons for that I can't really go into
just for confidential confidentiality sake.
[28:39] And then the other one, there was some
kind of agreement where essentially instead of getting five board seats, there
was only going to be two board seats, which wasn't going to give room for my
board picks. It was me and other hedge funds board picks. So that didn't work
out either. But it's really hard. And the idea is that most of them are not
going to work out from a proxy battle standpoint. So, you have to kind of look
at a lot and know that your batting average to get on a board is not going to
be high.
[29:12] And then the other thing too, right.
You also need sort of the right conditions. Right? So, the market obviously
gotten a lot cheaper in the last few weeks. But for most of the past year there
wasn't a lot of opportunity in the first place. So, you know, the criteria for
us was, we want it to be a small company. It's just a little bit easier, a lot
easier. The second thing is, when you're dealing with smaller companies,
there's less competition. So, there's a lot more alpha, when you're when you're
dealing in that space. The third thing is we were looking for companies where
the management doesn't really own a lot of stock to begin with, you know,
because if your CEO owns 55% of the stock, you're not going to obviously win a
proxy battle. And then we had to, you know, find a company where the stock
usually down a lot right to the so the company has probably been a little bit
or very mismanaged, and shareholders are going to be angry and pissed. If I can
convince enough shareholders to vote for my board slate over reelecting the
current board, and the current board doesn't own a lot of stock, those are the
conditions ripe to win a proxy battle. And even with all those conditions, it's
not easy. So, you know, that's how hard. It's hard.
Ney Torres: [30:30]
Yeah, I can imagine. Let me go through mental game with you. So, let's imagine
I want to be an activist which someday I want to be because there's a lot of
companies that need it. And the reason is, you know, the owners of the company
forget who they're working for, which is shareholders. And so, you walk in.
Let's say you buy a net net that's trading at 50 cents on the dollar. It takes
you a year or two to build a position. You get to 5% of ownership into the
company and you have to actually go and declare that you have 5% of the company
or more. As I understand, you have to declare what are your intentions? Right?
Eric Schleien: [31:14]
Yeah, you have to declare whether you're going to be a passive investment or
whether you're not going to be. Yeah.
Ney Torres: [31:20]
So you send a nice letter to the management and says, "Hey, I have 5% of
the company, will you be so kind of giving me a space on the board?" Is
that it?
Eric Schleien: [31:31] Not the way we're doing it.
Ney Torres: [31:33] Okay.
Eric Schleien: [31:34]
Yeah. The way we're doing it is typically not owning any stock in the company.
I'll use a real example because with hypothetical, there's many different kinds
of situations. I'm not going to say there's just one cookie cutter way to do
it. The one, at least I'm pursuing right now, there's a company. I can't say
what the company is but I found it, looked at it, and go, "Wow. There's
real money to be made here. The company is already making lots of revenue, which
I don't even know how because their website looks like it's from 1992. And I
don't even know how to get their service in the first place. Like, that's how
poorly the business is being run. It looks like you know, the management's very
entrenched, they're comfortable. They're going to make their money based off
some sort of contracts they already have and they don't really need to do
anything. The problem is the stock is down like 99% over the last decade, the
founder owns 20% of the company. There is an activist currently there. I don't
talk to him. So, I don't really know what he's doing per se. I'm actually going
to not talk to him just because there's potential legal ramifications if I
start colluding with him. So, you know, I keep my distance from that. But, you
know, there is going to be a board election coming up in about a year from now.
So, my job over this next year is to talk to current shareholders. Tell them
about what I'm doing with Tribal Leadership, share with them that me and Scott
and maybe a few other people, we actually did find a replacement CEO. If he
wins the election, he would become the new CEO. And who also has a background
in tribal leadership. I convince them that we would be a better fit.
[33:52] Now, if, if we convince them which I
don't think would be hard to do, because I think like if a monkey was running,
they might vote for the monkey over the current management team, that just how
bad they are, and they're desperate for something else. We would probably win
that election. Now, with that being said, you never know what could come up
between now and a year from now. You don't know how management's going to
react, what kind of legal tricks they might try to pull. There's never a sure
thing or a no brainer when it comes to activism. But as of now, that is the
game plan and how to move forward with that. I apologize for being so vague. I
just can't go into details for all those reasons.
Ney Torres: [34:33]
I understand it. There are legal reasons you can't do that. But you said two
things that are really interesting. You said you're not buying any stock?
Eric Schleien: [34:41] Not right now, no.
Ney Torres: [34:43] Oh, but you will?
Eric Schleien: [34:45] If we took over the board, we'd be
buying a lot of stock.
Ney Torres: [34:48] And do you think that will raise
the price immediately?
Eric Schleien: [34:52]
I would raise the price. It would raise the price a little. It's not going to
raise the price to a point where we know who he can bring the company to. I
mean you got to remember. When we're talking about exponential increases in
profits, the market is not going to price that in.
Ney Torres: [35:08] Got it. Got it. So, it has this
deep deep discount, but the potential is high.
Eric Schleien: [35:14] The potential is very, very high.
Yeah.
Ney Torres: [35:16]
Yeah. Got it. Got it. Okay. So, if you're successful in the proxy fight, new
CEO... So that makes sense. What about charges or fees on legal matters?
Eric Schleien: [35:32]
Yeah. So that would all be paid by my other colleague who does proxy battles
for a living. I can't go into anything with him.
Ney Torres: [35:46] Okay. So again, can I understand
the business model?
Eric Schleien: [35:50]
Sure. Sure. I mean the business model is basically go find tiny publicly traded
companies that are mismanaged where management doesn't have a lot of stock,
where there's low hanging room for improvement, had a board or a slate to
replace the management team convinced the shareholders to vote for your slate
over the management slate. And because you're working with tiny companies,
there's not a lot of people who were focusing on doing proxy battles and
activism with small and micro-cap companies. That's the model on the proxy
side. Where I come in is I'm adding the tribal leadership aspect to it as well.
Ney Torres: [36:37]
Got it. Got it. I think I understand. Okay. Very good. So, before we start
talking about the Quran environment and your take on it, do you have anything
else you want to add to activism, which I find super interesting?
Eric Schleien: [36:52]
Yeah. One of the interesting things about tribal leadership and you know, when
I talk programs before, the actual strategy work... So, you know, there is a
strategy model that we do give over to people to start building new strategies
from the new culture. But the strategy... In business, people want to look at
strategies. They go, "What's the technique? What's the tool?" Right?
They always want that thing. And I think that's very much sort of how American
culture works is we're very goal oriented. We want something that fits nicely
in a spreadsheet. If you look at sort of your... Do you know Michael Porter?
Are you familiar with him?
Ney Torres: [37:41] Yeah.
Eric Schleien: [37:42]
So, you know, they teach Michael Porter at Harvard. The guy's a genius. Someone
I really admire and really respect. But you know, if you learn the strategy
model, the model that's developed by him... Let's say you're effective 30% of
the time. That means you have 70% on the failure rate, you're considered
extremely effective. Like that's considered really, really, really good. If you
have a 30% success rate where you are producing the outcome in the time that
you said you would produce the outcome. And if you can do that 30% of the time,
you're going to be very effective. Now, the strategy model that I teach has an
80% effectiveness rate. It's not because I teach it, it's because it works
really, really well. It's been taught for, I think, at least 20 years.
[38:35] This model was developed by a guy named
John King. He's one of the key co-authors of tribal leadership, and he's really
the guy that developed all this work. John was in the military. It actually was
sort of inspired by military strategy models and then simplified a little bit
and then it works really, really well. But what's interesting is that the
strategy part is like the very last thing that I will teach people because the
culture work is 99% of the process.
Ney Torres: [39:12] There's a famous phrase
"culture eats strategy for breakfast", right?
Eric Schleien: [39:17] There you go. That's attributed to
Peter Drucker, right?
[39:21] And so, John was the first guy to
figure out actually how to impact culture reliably. Because Peter Drucker's
insight's really great but if you don't know how to impact culture, all you can
do is just be okay with the culture that you have and work on strategies to fit
your culture. That's kind of all you can do with that.
Ney Torres: [39:21] Yeah. I think you did something in
Udemy with him, right?
Eric Schleien: [39:45] I did. Yeah.
Ney Torres: [39:47] Yeah. Leadership by design.
Eric Schleien: [39:48] Yes. Yes. Cool.
Ney Torres: [39:50] I'm going to check it out.
Eric Schleien: [39:51]
Yeah. So, cool. Yeah, definitely check it out. When I teach culture, people
always said, "Well, can we just get to the strategy part?" It's like,
"No dude." Like, "No, we can get to the cultural part. And once
you are grounded and actually how to elevate an impact culture reliably, yes,
then we can do the strategy part and you can start building strategies that are
aligned with the new culture. That's why you see those exponential increases in
profits. It's not because I taught them something new. I mean I still am under
the impression that people can run their businesses better than I can, and run
their organizations better than I can. But when you have a new... The problem
is even if you're the CEO of a company and you're kind of in a toxic environment,
you can't just magically snap your fingers and have all your employees buy into
your new vision. The whole notion of buying is a load of crap. It really is
because people are going to do what they do. And if you get someone to buy in,
typically what you're doing it's a very stage three like thing to do, where
you're going to dominate people into buying into your vision. They know that
they're replaceable and that they could lose their job if they don't "buy
into your vision". So, a lot of the buying stuff is a load of garbage. I'm
really trying not to swear on your show.
Ney Torres: [41:14] Apple may not like it but that's
okay for me.
Eric Schleien: [41:16]
Yeah. Really, the big thing is the cultural component. I think what we're doing
is something very, very unique and very, very special in the realm of activism
because it's not just about "Let's bring in some consultant. Let's
motivate people. Let's cut some costs." I think those things are our... I
don't think the motivational stuff's that noble, but cutting costs, if there's
bloated costs is great and totally fine. It's that there's so much more alpha,
right? There's so much more you can actually create from that.
[41:16] So. if cutting costs is part of a new
stage four strategy, that's great. But there'll be a lot of more just natural
benefits and natural strategies that employees will create on their own, simply
as a default byproduct of the new culture.
Ney Torres: [42:14]
So, it seems like the hardest part of finding one of these companies is that
you need to find something that's able to grow multiple times, right? You're
not going to buy Dry Cleaners probably or stock that hosts bunch of dry
cleaners.
Eric Schleien: [42:30] Well, it's interesting. So, the
answer is I'm not going to say no to anything. I'll give you an example. There
was one company we had looked at. Again, I don't know if I have permission to
talk about it so I'm going to just err on the side of not talking about it.
They actually ended up getting bought out just a few months ago, but when we
looked at the company, they were making certain widgets. Again, the management
was deeply entrenched, bloated salaries. And they were kind of just being a
kind of passive with the business. They were not only not creating shareholder
value, they were just being complacent, happy to make their paycheck while the
company was in decline. The thing was trading at fractions of book value.
[43:18] I wasn't sure if there was a way where
you could turn this company around. I reached out to Scott, actually. He knew a
guy who he had coached, who runs a family business and they do similar kinds of
stuff. The guy grew his revenues over time. It was silly. It was like 800% or
1,000% or something ridiculous. We showed him the financial statements. We
showed him investor presentations. We just showed them everything about the
company. And from an operational standpoint, I don't specialize in that but
from an operational standpoint, because he knew that industry so well, he goes,
"Yeah. I think I actually... We could add some new products. There are
some new product lines where I could actually grow this business.
[44:11] Eric, if we take your methodology and
improve the culture with new operational efficiencies, you get this double
whammy, right? So, you get any improvements just from a better culture. And
then you get improvements from actually innovating. So, sometimes there is room
to innovate. And then sometimes the appropriate action is to actually let the
company sunset and to wind it down. There's nothing wrong with that, if that's
going to be the best use of shareholder value. And you can also be effective at
winding the company down and doing it in a responsible manner too, which there
is a cultural component to that as well, right. If you have a management team
that's just in it for themselves and taking a bunch of money on the way down,
there's going to be a lot less money for shareholders. So, there is application
to actually letting a business sunset and using tribal leadership in the context
of letting a business sunset. That's the appropriate action, which sometimes
you can discover through some natural collaboration.
Ney Torres: [45:25]
So, my understanding is, what it seems to happen is that people that go into
activism, there's the huge ones, right? Like, to be activists.
Eric Schleien: [45:34] Yeah, yeah.
Ney Torres: [45:35]
But most people, not most people, but the ones I read about and learn about,
they kind of get burned out. What do you think that is? Like, for example, Buffett.
He started doing that and didn't last long. Maybe he grew too much or just
turning around is just too difficult.
Eric Schleien: [45:54]
Yeah. Well, I have a very good friend of mine who does activism and he
already... We talk in the phone maybe every week. Maybe a month or two ago he
goes, "I don't know if I want to do something like this again. I'm just
wiped." The guy was just drained. But think about it, right? You're up
against what's most likely a stage three culture. You're up against management
teams that are in it for themselves. "I'm great, you're not." And
that's going to have an impact on the employee. So generally, you're going to
have employees that are high level salespeople stage three and then everyone
else in stage two. That's probably, the most common thing you're going to see
in a sort of dysfunctional company. So, it's not like the morale is going to be
great.
[46:42] So now, here you're coming in trying to
improve the business. Let's say you get in. Let's say you actually now get on
the board, whether you kick out the CEO or not, it's not like the culture
magically changes once the board of directors is replaced. The thing is I don't
have to do that myself to already know that because this is something I
specialize in. It blows my mind how unsophisticated some really, really smart
people are, where they go in and like they're shocked that things haven't
magically changed once the new board comes in. It's like, "Dude, there's
some deep-seated issues that are a little bit more than who was running the
company, FYI." But people don't really get that all the time.
[47:27]
So, you know, if you think the problem is the CEO, you're an idiot.
You're going to be in for a rude awakening, and be in for a real uphill battle.
When again, you have this vision, right? You now control the board. Right? So,
now you think I have control. I should be able to do what I want to do. But oh,
you actually have employees and you can't force employees to do something even
if they work for you or you threaten to fire them. So yeah, it becomes a real
uphill battle. If you're trying to take on new strategies to innovate or make
things more effective, and you've had a certain kind of complacent culture or a
level of resignation and cynicism within that environment, you know, good luck.
It's going to be very emotionally draining. And shocker, people get burnt up.
It would be weird if people didn't get burnt out if they had to do that all the
time.
Ney Torres: [48:23]
I think you described it perfectly. I've never have thought about it in that
way. So, you're turning into a Harry Bottle from Warren Buffett.
Eric Schleien: [48:32] Say that again?
Ney Torres: [48:34] You're turning into Harry Bottle.
Eric Schleien: [48:36] Who's that? Who's Harry Bottle?
Ney Torres: [48:38] He used to be the turnaround guy
for Warren Buffett back in the day.
Eric Schleien: [48:42] Oh, really?
Ney Torres: [48:43] When he didn't travel.
Eric Schleien: [48:45]
Okay. I know. I know who you're talking about. I didn't remember his name.
Okay. Sure. Sure. You can use that analogy. That's fine.
Ney Torres: [48:51]
This is crazy. Yeah, this is something you can do I guess at our age. Yeah,
20s, 30s, and maybe 40s but yeah. There's a lot of hard work but I think you
have super clear idea what you're doing and you thought about it a lot. You
know what you're going against with.
Eric Schleien: [49:09]
I will tell you the hardest part of this, quite frankly, was actually finding
the right people to partner with. Because look, I've only been running my
investment firm for four or five years now, right? I'm not managing hundreds of
millions of dollars. So, I wouldn't have had the capital just to do this on my
own. And it took someone who was a value investor, who already had some
experience on the proxy battle side who saw it was possible and said,
"Hey, I'd love to team up with you on this." Perhaps someone wants to
do that with me took quite a few years.
Eric Schleien: [49:54]
The thing is when I got this idea to do this, I actually just assumed that I
would just go work for a fund that was already doing this because I just
figured someone's already got to be doing this idea. I couldn't find anyone
doing this. There were some people who kind of talked like that but there was
there was nothing. I mean it was all just some form of consulting. Most of what
people call leadership, I really think is just management on steroids. It's not
actually leadership. It's just, "Let's teach you some new technique, which
is not leadership, by the way." So, I couldn't find anyone doing this, and
I go, "Well, that's weird. What am I missing out?" And I discovered
very quickly what I was missing. When I started reaching out to fund managers
to say, "Hey, I'd love to partner with you on this. This is what I'm
doing." Nobody was interested and they go, "Oh, wow." This is
why no one's doing it. This is the kind of uphill battle I'm going to have to
face. I got clear about what was going on. So, you know, being a value investor
that there's a certain mindset that not everyone gets. You know what I'm
saying?
Ney Torres: [51:11]
Yeah, for sure.
Eric Schleien: [51:14]
It's just some people even like put them through business. Like you can put
them through Columbia Business School and it will come out not fully getting it
you know. It's kind of interesting. I've actually seen people go through
Columbia Business School, done the value investing courses, they come out of it
and they still don't fully get it. And it's like, like maybe they're just not wired
for it. I don't know.
Ney Torres: [51:35]
But, yeah. As you say, I think there's a good way to describe there's three
levels of understanding something. Intellectual one when you read something,
the experiential one is when you do it, and the third one is when it's
automatic. But yeah, what is a temporary thing?
Eric Schleien: [51:55]
Yes. So, going with that, right. If you think about how hard it is for someone
to get like that mindset and philosophy around value investing, well, that's a
whole world, right? There's a whole rabbit hole. You can go with that. Well
now, think of it this way. There's a whole rabbit hole in the world of you
could call it transformational coaching, which tribal leadership is a part of.
There's a whole world around there too. And, you know, just like some people
will look at me and go, "Oh, you're an investor. You're just like a wall
street guy." They don't understand there's like a very big difference
between someone trading futures at Goldman Sachs and someone doing what I do.
Even though, you and I, there's obvious... It's like apples and oranges. To the
average person that kind of looks the same.
[52:40] Well, transformational work kind of
looks like motivational speaking or kind of looks like you're just pumping
people up and getting them on an emotional high and motivating people and doing
team building. And, I know that's ridiculous. There couldn't be anything
different. I mean one is a bunch of just surface crap and the other is like
doing real authentic very deep look at yourself about your environment and
doing real sustainable work and producing lasting results, not a three day
high. But again, to the average person that kind of looks the same. And not
only that, but in the coaching world, there's a certain space you have to be in
mentally, which is you're looking for possibility. You're looking to create
something that wasn't possible before. You're open. You are giving up any kinds
of resignations or disempowering interpretations, you know, things like that. I
mean it could be a very basic example.
[53:42] Well, if you're a good investor you're
doing the opposite. You're looking to be not only skeptical, but you're
actually attempting to be cynical and then having something prove you wrong.
Like having something you know, trying to attack an idea so hard that it's
garbage. If I listen to a management team saying, "Hey, I think we're
going to do a billion dollars in sales this year." Well, I'm looking to
see how that person is lying. Right? So, there's a completely different
headspace you have to be in to be a good investor than to be a good coach or a
good coachee. Right? It goes both ways.
[54:18] The problem is there are going to be
business people listening to this podcast right now, that are going to be like,
"Wow, he's just another consultant. He's just another flavor of the month
who's doing motivational stuff. It sounds like a total scam or an MLM, or a
cult. What kind of religion is he talking about?" People get all wacky
when it comes to this kind of stuff. And especially when you've trained your
mind to be resigned and cynical, which makes you a good investor. Well, that
same headspace that makes you a good investor is going to also not have you see
the value of something like this because this is based on actually building
relationships. So, it was very tough to find someone who didn't... The general
reaction was, "Well, it's not possible to change culture. Warren Buffett
talks about that." They'll say, "Oh, this sounds like an MLM. This
sounds like a scam." I got everything in the book. Or people just said,
"Oh, I don't really understand it. I only do what I understand. I wish you
the best but it doesn't really make sense to me." So, I had to go through
a lot of people to finally find someone who goes, "Wow, this is awesome. I
really get it. I really see what's possible."
Ney Torres: [55:40]
And let me ask you because it looks like you're super well connected. You
interview great value investors in your podcast and all of that hedge fund
managers. Did you actively look around knocking doors and saying, "Look, I
want to start this fund. It's going to be an activist fund, and it's going to
do this."
Eric Schleien: [55:57]
Ah, yes. Not literally knocking doors but sending out lots of emails, setting
up phone calls. I had a lot of people take my call. It's not like the call went
bad. They were normal conversations but you could just tell they were not
interested or they would flat out say like, "I don't really understand
this." or "This sounds a little weird.", "I'm not really
sure this would work, but I hope it does." The resignation would bubble to
the surface in these conversations. They usually wouldn't go anywhere.
[56:30] The truth is, if someone's already made
up their mind about something there's... Charlie Munger would call it
psychological anchoring. There's nothing that I could say to convince someone
if they've already made up their mind about something. And quite frankly, I
wasn't interested. I know how well this stuff works. I wasn't interested in
having to bend over backwards for 100 hours to convince someone of something
that was obvious. The person that I partnered with or people I partnered with,
I wanted this to be obvious to them. If it wasn't, I wasn't interested.
Ney Torres: [57:03]
Wow. So, you find a great match. Interesting! Which is what I've been thinking
about. I don't think he minds. I'm going to mention Evan Bleker here. We were
talking the other day. We were just saying, "To do risk, whatever you're
doing in investments. You have to turn into an activist sometimes. That's the
next step in investing." He was like, "Yeah, but if you don't have
that lawyer next to you not charging you..." Because a proxy fight will
cost $100,000 something like that.
Eric Schleien: [57:34] No kidding. Yeah. It gets expensive.
Ney Torres: [57:37] It gets really expensive.
Eric Schleien: [57:40]
Especially when you've already drafted up all the documents and then the day
after the proxy gets cancelled because they've negotiated with another fund,
right. I mean that's literally has happened. That's $100,000 down the drain.
Ney Torres: [57:58] Yeah.
Eric Schleien: [58:00] So, if you don't have those
resources, it's not going to work.
Ney Torres: [58:05]
How does that your fund correlates with your existing fund? Or are you mixing?
Eric Schleien: [58:11]
It got nothing to do with it. I have my investment management firm, which
there's no activism involved. It's straight value investing, very niche stuff
for the most part. And then, there's this new venture that I'm doing, which is
where I don't have a fund to do this on my own, but I'm partnering with people
who do have funds, and making a difference that way.
[58:36] The idea is that I do a few of these
get very successful and people in the value investing community talk through
that. My whole thing is I won't raise money until I've done stuff myself. And
you know, I've done this with nonpublic companies and I've done this with
groups and organizations. Let me do this a few times with some public
companies. I'll show people what I'm made of. I'll show people what I can do.
Then I'll raise some capital for fun. But you know, right now I'm just
partnering with other fund managers.
Ney Torres: [59:06]
I'm really excited to interview you at this stage of your career, man. I just
can't wait to see how you evolve and all of that. I think it is a good moment
to stop the podcast today. We've talked about culture and activism and how
culture is a very important part in the next level of stock investing.
Eric Schleien: [59:31]
Yeah. If I may add one thing too, is even if you don't email... If you're not
trained on how to impact culture, or if you are and you're just not doing any
kind of activism, there are still ways where you can actually train yourself
and learn how to identify where culture is at because there's what management
says, and there's how it really is. There are things you can look for or you
know, once this coronavirus goes away, you can go into some stores and actually
get a sense of where culture is at. People are shocked right now that Lululemon
has done so well in retail. You hear it all the time. "Wow, Lululemon has
outperformed other peers and their retail." Well, the guy who, Scott, who
I'm partnering with, well, he helped develop the culture at Lululemon. And, you
know, shocker. They have vastly superior culture to most retailers, and their
performance speaks for itself. If you could identify that Lululemon had
something that you couldn't read on a financial statement, and that's something
an analyst just don't look for, they really don't look for it, you could have
an edge in the market.
Ney Torres: [1:00:55]
Yep, agree. In fact, I'm thinking that's going to be my next stage in
developing as an investor is going to start learning about, we'll just talk
about this last hour because it is something... Lululemon is always in my radar
and I don't get it. It's like, "Whoa, okay. They sell yoga stuff."
And it's obvious they have a great culture.
Eric Schleien: [1:01:15] It's very expensive yoga stuff too.
I spent $200 on a pair of yoga pants.
Ney Torres: [1:01:22]
And he wondered how do they do it? And now you said it, there's a culture. It
has value and it looks like what you're saying is, "Okay. You can measure
that you can actually learn about valuing culture."
Eric Schleien: [1:01:37] Yeah. Well, you can measure the
byproduct of it. Do you mind if I just leave you with one more thing for your
listeners?
Ney Torres: [1:01:44] Yes, please. Go ahead.
Eric Schleien: [1:01:46]
There is a notion in finance and really in anyone doing analytical work that if
you can't measure something, it doesn't exist. That notion is so illogical,
right? If you want to talk about trying to be logical and rational. For
instance, have you ever been in love before?
Ney Torres: [1:02:14] Yep.
Eric Schleien: [1:02:15]
Okay. Can you measure that into a spreadsheet on what degree of love...? I
mean, do you see where I'm going with this?
Ney Torres: [1:02:20] Yeah.
Eric Schleien: [1:02:21] Do you do value family?
Ney Torres: [1:02:24] Yeah.
Eric Schleien: [1:02:24]
Can you put that into a spreadsheet of how much... what the value? So there's
these things that clearly are important to humanity and to our overall. I mean
the truth is if you have no family and no support system and you lack love in
your life, you're probably going to be a little less effective generally in
life. I mean that's been vastly shown to be true. How do you measure that
specifically? I mean, there's social scientists’ ways you can do it and there's
some ways you can do it with polling. But in terms of the personal working at
HR at a company, where do you put that into your little model financial model
spreadsheet. I mean you really can't.
Eric Schleien: [1:03:03]
Now you could see the byproducts of it. But this idea of... and I hate this
word. The fact that a lot of this stuff is called soft skills. Well, they're
not soft. They're not soft at all. They take lots of work, lots of training,
lots of development, and they're not as nuanced as people think. And just
because there isn't some formula you can put into a spreadsheet, does not mean
it does not exist.
Ney Torres: [1:03:30]
Yeah. Just to add something here. I just can't stop thinking about a book from
Colby. It's called Trust. He argues through the book that trust is something
that can be measured and he proves it. When you have trust in partnership or a
company, you can exponentially grow your results. But if you don't have it, you
can prove that like having a 90% tax depending on the level. So, yeah, it can
be measured. It can be, as you say, not soft science, but something you can
actually...
Eric Schleien: [1:04:10]
Yeah. You can measure culture. It just doesn't fit into a spreadsheet, but you
can measure it.
Ney Torres: [1:04:15]
Yeah, yeah. You just explained it. Exactly. Well, thank you very much, Eric.
It's been a pleasure. I hope I can interview you for more things. I think we
can talk on so many subjects.
Eric Schleien: [1:04:26] Yeah. I can see if Scott would like
to come on with me next time.
Ney Torres: [1:04:29]
I really appreciate it, man. Really appreciate it. Awesome. So, thank you so
much for your time and see you in the next episode.
